Key Post Director giving a loan to his company

turbo123

Registered User
Messages
22
Hi

I'm about to start up a new company with another guy and we plan on giving the company a loan to get us up and running.

What are the financial implications of taking this loan back out of the company in a years time?

Thanks in advance.

Turbo
 

simplyjoe

Frequent Poster
Messages
535
Yes. However sometimes it might make sense to take it as salary and defer the loan repayment. This would make sense if you had no other income in the tax year. If you do not use your personal allowances in a particular year you lose them! Obviously you would only take this option if you were confident of profits arising to absorb the salaries.
 

Brendan Burgess

Founder
Messages
39,186
This is an area which needs a Key Post

I have seen people taking large taxable salaries from their companies while they have big loans to the company. In fact, I have seen such companies go into liquidation owing the money to the directors. It would have made sense to repay the loans before paying the salary.

Lending money to a company is a good way to finance a company. If the director has to personally borrow the money e.g. remortgage the home, the director can set the interest on the personal loan against his taxable income.

Bear in mind that if the company is getting into financial difficulty and you repay the loan, it could be regarded as preferential treatment of creditors.

Brendan
 

Paddy199

Frequent Poster
Messages
482
Great post Brendan. The tax relief you refer to is section 248 if people want to look it up for themselves. It must be for working capital and so many overlook it.
 

Brendan Burgess

Founder
Messages
39,186
I hadn't realised it was that good!

I will make this a Key Post until someone does a better one on the topic.

Brendan
 

turbo123

Registered User
Messages
22
thanks for the replies :)

For the first year we wont be taking a salary from this company as we still have ordinary PAYE jobs, after the first year all we plan on taking is our loan back and then a small sum of the profits which we will pay the revelant taxes on.....
 

turbo123

Registered User
Messages
22
This is an area which needs a Key Post

I have seen people taking large taxable salaries from their companies while they have big loans to the company. In fact, I have seen such companies go into liquidation owing the money to the directors. It would have made sense to repay the loans before paying the salary.

Lending money to a company is a good way to finance a company. If the director has to personally borrow the money e.g. remortgage the home, the director can set the interest on the personal loan against his taxable income.

Bear in mind that if the company is getting into financial difficulty and you repay the loan, it could be regarded as preferential treatment of creditors.

Brendan
so would it better for me to get a loan for X amount instead of using my own cash funds or is it irrelevant until i take a salary from the company?
 

Brendan Burgess

Founder
Messages
39,186
Whether you use your cash or whether you borrow is a much bigger issue.

However, if you do borrow, for working capital, then you can get tax relief on it.

If you have borrowings for lending to the company and for, say, a car loan, you should repay the car loan first as you get no tax relief on those borrowings.
 

turbo123

Registered User
Messages
22
Whether you use your cash or whether you borrow is a much bigger issue.

However, if you do borrow, for working capital, then you can get tax relief on it.

If you have borrowings for lending to the company and for, say, a car loan, you should repay the car loan first as you get no tax relief on those borrowings.
what so you mean by "Whether you use your cash or whether you borrow is a much bigger issue."

I get the rest :)
 

Brendan Burgess

Founder
Messages
39,186
Your original question was capable of being answered with a definitive answer.

If you are putting money into a company, generally you would not borrow if you already had cash in the bank. There would be no right answer to this as you would may have reasons for borrowing e.g. the need to keep cash reserves for something else.
 

LDFerguson

Frequent Poster
Messages
4,096
If you have the cash to lend to the company, you shouldn't borrow. Tax relief on the borrowing only reduces the cost of borrowing; there's still a cost. Not borrowing at all has a lower cost.

The only exception I can think of here is where you can get a loan with an interest rate that's low, so that the net cost (after tax relief) of the borrowing is lower than the rate of interest you can get on your savings.

I'm ignoring intangible factors here and assuming that you have the money to lend to the company without leaving yourself personally in a position that you may need to borrow later.
 

turbo123

Registered User
Messages
22
Thanks again

so getting back to my original question, I as a director can lend the company money and reclaim it after x amount of time without any tax implications, though all depending if we're successful :)
 
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